Chapter 13 – The Costs of Production

question

The goal of a firm

answer

maximize profit

question

Total Revenue

answer

-The amount a firm receives for the sale of its output
- TR = P x Q

question

Total Cost

answer

The market value of the inputs a firm uses in production

question

Profit

answer

Total Revenue - Total Cost

question

Explicit costs

answer

Input costs that require an outlay of money by the firm (paying wages to workers)

question

Implicit costs

answer

Input costs that do not require an outlay of money by the firm (opportunity cost of the owner's time)

question

Total cost equation

answer

explicit costs + implicit costs

question

explicit cost of capital

answer

The interest paid every year one borrowed money

question

implicit costs of capital

answer

the opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way

question

Accounting profit

answer

total revenue - explicit costs (ignores implicit costs, so higher than economic profit)

question

Economic profit

answer

total revenue - total costs (explicit + implicit costs)

question

Production function

answer

-the relationship between quantity of inputs used to make a good and the quantity of output of that good
-Gets flatter as production rises

question

Marginal product

answer

-the increase in output that arises from an additional unit of input
-Slope of the production function

question

Marginal product of labor (MPL)

answer

The change in total product resulting from a change in the labor input. MPL = dTPL/dL

question

Diminishing marginal product

answer

-the marginal product of an input declines as the quantity of the input increases
-Slope of production function decreases

question

Hiring one extra worker

answer

-Increases output by MPL
-Increases costs by the wage paid

question

Total Cost (TC)

answer

-FC + VC (Fixed costs + Variable costs)
-Total cost of producing a given amount of output

question

Fixed Costs, FC

answer

-Costs that do not vary with the quantity of output produced
-Incur even if production is zero

question

Variable costs, VC

answer

Vary with the quantity of output produced

question

Average fixed cost

answer

fixed cost divided by the quantity of output (FC/Q)

question

Average variable cost

answer

variable cost divided by the quantity of output (VC/Q)

question

Average Total Cost (ATC)

answer

-TC/Q or AFC + AVC
-The cost of the typical unit produced

question

Marginal Cost

answer

-change in total cost / change in quantity
-The increase in total cost that arises from extra unit of production

question

MC < ATC

answer

ATC is falling

question

MC > ATC

answer

ATC is rising

question

The MC curve crosses the ATC curve at

answer

at the ATC curve's minimum

question

Short run (SR)

answer

-Some inputs are fixed (ex: factories, land)
-The costs of these inputs are FC

question

Long run (LR)

answer

- All inputs are variable (ex: firms can build more factories or sell existing ones)

question

In the long run

answer

ATC at any Q is the cost per unit using the most efficient mix of inputs for that Q (ex: the factory size with the lowest ATC)

question

Economies of scale

answer

- Long-run average total cost falls as the quantity of output increases
- Increasing specialization among workers
-More common when Q is low

question

Constant returns to scale

answer

- Long-run average total cost stays the same as the quantity of output changes

question

Diseconomies of scale

answer

- Long-run average total cost rises as quantity of output increases
-Increasing coordination problems in organizations
-More common when Q is high

question

A firm's cost often depend on the time horizon considered

answer

-many costs are fixed in the short-run but variable in the long run
-Average total cost may rise more in the short run than in the long run

1 of 33

question

The goal of a firm

answer

maximize profit

question

Total Revenue

answer

-The amount a firm receives for the sale of its output
- TR = P x Q

question

Total Cost

answer

The market value of the inputs a firm uses in production

question

Profit

answer

Total Revenue - Total Cost

question

Explicit costs

answer

Input costs that require an outlay of money by the firm (paying wages to workers)

question

Implicit costs

answer

Input costs that do not require an outlay of money by the firm (opportunity cost of the owner's time)

question

Total cost equation

answer

explicit costs + implicit costs

question

explicit cost of capital

answer

The interest paid every year one borrowed money

question

implicit costs of capital

answer

the opportunity cost of the capital used by a business—the income the owner could have realized from that capital if it had been used in its next best alternative way

question

Accounting profit

answer

total revenue - explicit costs (ignores implicit costs, so higher than economic profit)

question

Economic profit

answer

total revenue - total costs (explicit + implicit costs)

question

Production function

answer

-the relationship between quantity of inputs used to make a good and the quantity of output of that good
-Gets flatter as production rises

question

Marginal product

answer

-the increase in output that arises from an additional unit of input
-Slope of the production function

question

Marginal product of labor (MPL)

answer

The change in total product resulting from a change in the labor input. MPL = dTPL/dL

question

Diminishing marginal product

answer

-the marginal product of an input declines as the quantity of the input increases
-Slope of production function decreases

question

Hiring one extra worker

answer

-Increases output by MPL
-Increases costs by the wage paid

question

Total Cost (TC)

answer

-FC + VC (Fixed costs + Variable costs)
-Total cost of producing a given amount of output

question

Fixed Costs, FC

answer

-Costs that do not vary with the quantity of output produced
-Incur even if production is zero

question

Variable costs, VC

answer

Vary with the quantity of output produced

question

Average fixed cost

answer

fixed cost divided by the quantity of output (FC/Q)

question

Average variable cost

answer

variable cost divided by the quantity of output (VC/Q)

question

Average Total Cost (ATC)

answer

-TC/Q or AFC + AVC
-The cost of the typical unit produced

question

Marginal Cost

answer

-change in total cost / change in quantity
-The increase in total cost that arises from extra unit of production

question

MC < ATC

answer

ATC is falling

question

MC > ATC

answer

ATC is rising

question

The MC curve crosses the ATC curve at

answer

at the ATC curve's minimum

question

Short run (SR)

answer

-Some inputs are fixed (ex: factories, land)
-The costs of these inputs are FC

question

Long run (LR)

answer

- All inputs are variable (ex: firms can build more factories or sell existing ones)

question

In the long run

answer

ATC at any Q is the cost per unit using the most efficient mix of inputs for that Q (ex: the factory size with the lowest ATC)

question

Economies of scale

answer

- Long-run average total cost falls as the quantity of output increases
- Increasing specialization among workers
-More common when Q is low

question

Constant returns to scale

answer

- Long-run average total cost stays the same as the quantity of output changes

question

Diseconomies of scale

answer

- Long-run average total cost rises as quantity of output increases
-Increasing coordination problems in organizations
-More common when Q is high

question

A firm's cost often depend on the time horizon considered

answer

-many costs are fixed in the short-run but variable in the long run
-Average total cost may rise more in the short run than in the long run

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Chapter 13 – The Costs of Production

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